Last Updated on April 6, 2020 by Sultan Beardsley
Dario Health (NASDAQ: DRIO)
Rating: Strong Buy
Ticker: DRIO (Last: $8.40)
Market Cap: $60M
Price Target: $16-20
Timeframe: 0-24 weeks
This year I had the opportunity of attending the 38th Annual JP Morgan Healthcare Conference in San Francisco, CA. Amid the hustle and bustle of pharma execs and investors, I caught wind of an emerging trend in 2020, Digital Therapeutics (DTx). DTx is a relatively nascent industry powered advancements in digital technology and artificial intelligence. Interestingly, this appears to be as much as an emerging trend in data science and analytics as it is in pharma.
Chronic diseases are and have been plaguing the U.S healthcare system for decades. Eighty percent of seniors and forty percent of the U.S. general population suffer from a chronic disease (i.e. diabetes, hypertension, obesity, mental health, etc.) costing private and governmental payors trillions of dollars annually. Over the past few years, compelling evidence has surfaced demonstrating DTx solutions translate into improved clinical and economic outcomes. As a result, the top 10 DTx players raised $1.8B from venture capitalists as of August 2019 and garnered support from insurers and big pharma such as Cigna, Roche, Abbott, and Novartis.
Human biology is incredibly complex and especially in the scope of optimizing the management of an asymptomatic disease like diabetes. Numerous internal and external factors are constantly in flux affecting disease pathology and thus influencing a patient’s pharmaceutical and nutritional needs at various timepoints. Through synchronizing proprietary wearable devices, personalized data analytics, and coaching offered by DTx solutions patients can better manage chronic conditions; the effects of which have already begun to percolate throughout the healthcare value chain.
Among the roughly 25 DTx companies vying for a piece of a projected $25B market by 2025 growing at a 6-year CAGR of 21% only two are publicly traded: Dario Health (Nasdaq: DRIO) and Livongo (Nasdaq: LVGO). The former has a market cap of $60M while the latter is valued at $2.6B. Livongo is a solid company. The current value disparity is attributable to several factors including timing of market entry, support from institutional investors, and an emphasis on business to business (B2B) vs. business to consumer (B2C) commercial strategy. In the rest of this article, I’ll discuss how 2020 is poised to be a transformative year for DRIO and elucidate how their DTx solution actually exceeds that of LVGO’s.
Let’s begin with the similarities. To date, the primary disease target has been diabetes for both companies. DRIO and LVGO offer personalized hardware/software devices enabling diabetics to monitor blood glucose levels in realtime. Based on readings a patient receives instant digital feedback and insights from a real-life coach empowering adoption of personalized lifestyle regimens (food intake, exercise, etc.) conducive to effective disease management. The key difference is in how their respective platforms are designed, scalability of cost structures, and global footprint (Figure 1).
Figure 1: DTx Competitive Analysis from DRIO Corporate Presentation
A diabetic that uses DRIO’s platform has the convenience of plugging in his/her all-in-one pocket-sized glucose monitoring system into their smartphone (Figure 2). The user can then receive instant and highly accurate blood glucose measurements in under 6-seconds from a single blood droplet. All the data is stored and analyzed by DRIO’s proprietary software which tracks key metrics such as carbohydrate levels, physical activity, as well as medication intake. Moreover, all the data is compiled and shared with a personal coach, healthcare providers, and family members (Figure 3). The ability to capture this data continuously makes it possible for the patient to mitigate and even prevent short and long-term health consequences such as lethargy, nerve damage, and heart disease. By extension, this reduces the economic strain of mismanaged diabetes on our healthcare system which was estimated at $212B in 2012.
Figure 2: DRIO’s All-In-One Glucose Monitoring Device
Source: DRIO Presentation
Figure: 3: DRIO’s Data Analytics Suite
Source DRIO Presentation
LVGO’s platform offers the same benefits for diabetics and payors, however, their software is a closed platform meaning its only accessible to professionals within their network. Additionally, LVGO’s hardware is bulkier and does not plug into smartphones (Figure 4). The open-ended feature of DRIO’s software gives them the flexibility to license their software to third parties, insurers, and other medical device and pharma companies. Cost is another key differentiator. The standard membership for LVGO is $75 per member per month (PMPM) whereas DRIO’s standard PMPM fee is $25 and $59 for a premium membership (i.e. for significantly smaller cost users get a comparable yet more convenient service).
Figure 4: LVGO’s Diabetes Platform
These factors paired with DRIO’s more cost-effective structure makes it feasible to scale its business into the B2B space and new territories while maintaining a foothold in the B2C market. DRIO has made it clear that this is their strategy for 2020 and beyond. Improvements in revenue and profit margin in 2019, the closing of a $21M private placement, as well as the appointment of former Catasys Inc. (Nasdaq: CATS) executive Rick Anderson as DRIO’s President and General Manager of North America are evidence of the strategy materializing.
Our team is especially excited about the news of Rick leading the commercial charge in North America. At CATS he was extremely successful at forging strategic partnerships. In May of 2018, he facilitated an agreement with the nation’s second-largest health plan in the United States. Then in October of 2018, he scored again by landing an agreement with Capital Bluecross (a major insurer serving 21 counties in Pennsylvania) linking them with CATS’ AI-healthcare technology. The fact that he left CATS to undertake DRIO’s North America commercial operation speaks volumes about the company’s potential to become a leader in the DTx, and even data science spaces. Our team is confident he will deliver the same caliber of results at DRIO creating value for its stakeholders and customer base.
The emergence of DTx solutions is poised to disrupt the pharma value chain. Clinical outcome studies have shown that DTx solutions like DRIOs and LVGOs can reduce the insulin intake of diabetics. Consequently, sales of insulin drug makers could be significantly impacted. It follows then that it behooves pharmaceutical incumbents to partner with DTx companies and leverage their data to enhance and diversify their product portfolios. Big pharma is finally catching onto this emerging trend evidently too. In May of 2019 a joint study of diabetics using Wellthy Therapeutics,’ Wellthy Care Digital Therapeutic integrated with Roche’s Accu-Chek Active blood glucose monitor achieved reduced levels of fasting blood glucose and random blood glucose. Medical device companies stand to benefit from teaming up with DTx players; not only by expanding their customer base but also their product/service offerings. Omron did just that by partnering with LVGO, Omada, and Lark gaining access to their hypertension management programs. With Rick Anderson at the helm of DRIO’s North America Commercial team and a competitive, as well as, scaleable DTx platform, I suspect DRIO will secure similar partnerships in 2020.
In summary, MS Money Moves and its affiliates are investing in DRIO as a deep value play in the nascent DTx industry. The risk-reward profile offered by DRIO is quite attractive. On the heels of a $21M private equity financing, the strategic hiring of a talented executive, and a concerted strategy to forward and scale its competitive DTx platform in the rapidly evolving DTx space at a market valuation of merely $60M, DRIO has immense upside potential. What makes it even more enticing, and what most investors do not realize yet, is that DRIO is as much a data science company as it is a healthcare company. That means an acquisition by Google is just as likely as one by Roche or Novartis. Big money is made by buying stocks before others catch on to valuation inefficiencies. In our view, that time is now for DRIO and we have thus established positions and rate DRIO as a strong buy with a $20 six-month price target.
DRIO 2-Month Chart Following Its Revere Split in November of 2019
Trendline Support: $7.50
20-day SMA: $7.20
50-day SMA: $6.80
Average -day Volume: 21K shares
Let’s get this bread!!!